The Absurd Cost of Complexity

Lean folks are naturally tuned to recognize unnecessary complexity, and most of us know the largest cost in a manufacturing operation is usually not traditional material, labor, or overhead. It's unnecessary complexity. Archane and overbearing bureaucracies driven by a lack of trust fueling a lack of creativity and accountability.

Complexity is costly. This week we once again came face to face with one form:

Not only the absurd length, but last year alone there were 579 changes – more than one a day. Only companies the size of GE can employ enough green eyeshade types to keep ahead of it – and legally take advantage of it – for which we castigate their genius and investment. What's the real culprit?

The cost? Try $431 billion annually to stay ahead of the changes, complete the forms, comply, and enforce.

In a study published last week by the Laffer Center, my colleagues Wayne Winegarden, John Childs and I estimate that these costs alone are a staggering $431 billion annually. This is a cost markup of 30 cents on every dollar paid in taxes. And this is not even a complete accounting of the costs of tax complexity.

A 30 cent markup – or loss to the overall economy depending on how you look at it. How much are we trying to save with the budget shenanigans of both the left and right?

David Keating of the National Taxpayers Union provides a useful perspective on how big the tax compliance industry is. According to his research, as of 2009 the income-tax industry employed "more workers than are employed at the five biggest employers among Fortune 500 companies—more than all the workers at Wal-Mart Stores, United Parcel Service, McDonald's, International Business Machines, and Citigroup combined."

Simplifying the tax code should be a top priority. Regardless of the reform approach taken, the U.S. economy will be enhanced greatly by significantly reducing the complexity of the current tax code. In a time of global economic competition, we cannot afford the luxury of a Byzantine tax system.

There's some money for you, in case you're looking. Anyone want to bet on whether there will be changes? Nope, raising taxes, slashing programs, or simply going further into debt is far easier.

But what really tweaked me a bit today was an article in the local paper on a large-scale solar energy project. We all want alternative energy, but we make it exceedingly difficult. Two different companies have proposed large projects in the wild empty sunny plains a few miles from here. The first got shot down quickly because some rodent habitat wasn't effectively addressed. The second finally, finally got approved. Sort of.

Greg Blue, project manager with applicant SunPower Corp., said the company will now concentrate on fulfilling 148 conditions the county is requiring before construction can begin.

148 conditions before construction can begin. Seriously? How bad do we want alternative energy again? At what cost? And we wonder why other countries are moving quicker than we are to develop renewable resources.

Don't just try to increase your inputs or raise the price of your outputs – try attacking the unnecessary complexity in your conversion processes. Whether that's making widgets, delivering services, or perhaps even making dinner. Speaking of which…

Comments

Love the chart, we have a very similarly shapped one that shows the number of pages in our operations MI “dashboard”, currently running at well over 1100 “killer KPI’s”. This is of course all the more perverse as the point of MI is to make things clear.

Any thoughts on how to apply the Pareto principle to that problem would be more than welcome.

I’ve thought for years that a flat tax for all – one that would be flexible in its rate depending upon our country’s circumstances (war, economy, etc.) – would be fair, less complicated, and less wasteful, but the special interests and lobbyists wouldn’t stand for it. They, unfortunately, are the ones who tell the politicians what to do, with a little “incentive,” of course. We as voters have significantly less influence.

Kevin, the bigger problem is keeping the tax code simpler — it was simplified in 1986, and now look at it. After all, if politicians can’t continually screw around and mess things up, how do they justify their existence? (One plus for Texas over California: the Texas legislature meets much less often, so there’s less time for them to make mischief)

BTW, the Washington Examiner has a columnist dedicated to pointing out corporate welfare (Timothy Carney IIRC), which is a major contributor to this mess.